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By Tom Winnifrith & Steve Moore | Wednesday 11 July 2018
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.
Petropavlovsk (POG) is a stock we banked small gains on last year after finding ourselves on the losing side of a boardroom battle, though noting we still believed the fundamentals remained attractive. The share price is not greatly changed – but the former management is now back and so…
Operations: The company is a significant gold miner in Russia – as at 31st March it had produced approximately 6.9 million ounces of gold and it is a leading employer and contributor to the development of the local economy in the Amur region, Russian Far East, where it has operated since 1994. It is producing from a combined 3,430km2 license holding and is in the construction phase of a state of the art pressure oxidation facility (‘POX hub’) to process its substantial refractory resource base. It is also a 31.1% shareholder in IRC Ltd, a Hong Kong-listed iron ore producer with operations in the Russian Far East and North-eastern China – and is also guarantor of IRC's $340 million project finance facility.
Management: Following a board change General Meeting requisition in May, the company “received a letter from certain Russian employees of Petropavlovsk's operating subsidiaries that notes their support for certain of the proposals put forward by the requisitioning shareholders” and largest shareholder, Kenes Rakishev, along with other major shareholders, “received a letter from a trade union representing thousands of Petropavlovsk employees calling for shareholders to back the requisitions”. That included criticism of the board for not taking the time to engage with staff and questioned their experience and remuneration (including £700,000 basic for the CEO).
Recently the requisitioners won the day – seeing the return of Pavel Maslovskiy as CEO and of Sir Roderic Lyne and Robert Jenkins as non-executives. Maslovskiy co-founded the company in 1994, was previously CEO and, prior to embarking on his business career, was a Professor of Metallurgy at the Moscow Aircraft Technology Institute. Roderic Lyne and Robert Jenkins are also fluent Russian speakers – the former a prior British Ambassador to Russia and Senior Independent Director here and the latter a former director here with almost 25 years of Russian industry-related expertise.
Financials: Results for 2017 showed gold production up towards 440,000 ounces, though lower underlying earnings due to higher costs - all in sustaining costs increased 19% to $963 per ounce. Net debt was only reduced by $13.5 million to $585.1 million. First quarter of 2018 production was 112,556 ounces, a circa 5% decrease year-on-year – this attributed to “a positive contribution to production from gold in circuit in Q1 2017”, with “full year 2018 production forecast of 420-460koz reiterated”.
However, that’s with the criticised management – the trade union letter, for example, stating that under their leadership more than 1,900 employees left the company of their own free will – representing a staff turnover of 24%. The new management now have to see for themselves what the situation is that they are inheriting and we understand will provide an update as soon as possible.
Risks: There is risk in what the returning management find and, despite our confidence in them, delivery can clearly not be guaranteed – particularly in this sector. As well as general mining and commodity price risks, there is also Russia risk. However, these are experienced operators in the region and we consider the macro backdrop supportive of gold. The noted current debt obligations clearly mean financial risk, but there is cash generative production and the IRC interest to be reviewed.
Outlook & Valuation: The above noted performance hardly suggests value from a current still more than £250 million market cap. However, it’s clearly not been delivered from the best of working environments – and, as emphasised by Kenes Rakishev, the POX hub project “is the foundation of the company’s future, and was designed and implemented… led by Dr Pavel Paslovskiy, and will enable the market to revaluate the company’s share price”. Rakishev is an experienced entrepreneur and investor, previously involved with base metals producer Central Asia Metals (CAML), and considers the team here now has “the technical ability and know-how to deliver the POX Hub and set Petropavlovsk on a path to growth”. The company previously updated that the POX development was progressing towards starting commissioning in Q4, with a ramp up to commercial production throughout 2019. We will now have to await the new management’s update on this – but are confident the longer-term potential remains.
However, even a total of 450,000 ounces of annual production at a $300 per ounce margin throws off a gross $135 million (more than £100 million) and there also looks upside potential in exiting the IRC interest and future M&A - Rakishev, for example, considering “there are M&A opportunities in undervalued gold assets in both Russia and Central Asia that have the potential to significantly deliver value for shareholders”. The short-term looks dependent on what the returning management find, but this looks a good one to buy and tuck away at a current sub 8p share price. At up to 10p, the shares are once again a buy. Target 20p+ to sell.
This article first appeared on the Nifty Fifty website which Tom Winnifrith runs with Steve Moore & Lucian Miers. To access the website ahead of the next share tip from Tom & Steve and a new shorting piece from Lucian shortly click HERE
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